The Low-Down: Why Platform Strategies Deliver Growing Financial Benefits

In an increasingly digital economy, with a growing body of experienced users, demand and financial performance appear to expand in concert as platforms ease of use and speed are enhanced. Which is entirely consistent with the underlying strategic premise of internet benefits. JL

Jacques Bughin and Nicholas van Zeebroeck report in McKinsey Quarterly:

The correlation between financial performance and the 12% of companies that have chosen to create new platforms; one in five companies that pursued the “offensive” option did much better than one in ten defensive companies. Benefits increase when platforms redefine value propositions. Many companies do so by providing an easier experience for customers. Demand driven platforms, combined with an offensive digital corporate strategy, are strongly correlated with superior financial performance, of about seven percentage points in earnings
Digital attackers in most industries can severely drain the profits and revenues of incumbent players, as we have shown in recent research. Companies under pressure, though, can limit the damage if they adopt an offensive corporate strategy, one that involves willingly cannibalizing existing businesses and reallocating resources aggressively to new digital models. Which digital business model—when deployed offensively—offers the best odds for regaining lost ground? We dug deeper into the data from our survey of more than 2,100 global executives. Which digital business model—when deployed offensively—offers the best odds for regaining lost ground? We dug deeper into the data from our survey of more than 2,100 global executives
and found that going beyond the mere digital delivery of products or services and setting up an online marketplace correlates with markedly improved performance at established companies.
Platform play. Such online exchanges, or platforms, are a growing feature of digital competition, and the favored operating model of most of the largest Internet companies. Few incumbents, however, are responding with platform moves of their own. The exhibit maps the strategic responses of the 2,100–plus companies and highlights the 15 percent of them reporting “offensive” corporate-strategy moves. Their revenue and earnings over the last three years, on average, are superior to those describing their strategic reaction as “defensive.”

Exhibit

A significant finding is the correlation between recent financial performance and the 12 percent of companies in the sample that have chosen to create new platforms
The biggest impact appears to be on the one in five platform companies that pursued the “offensive” option. They did much better than one in ten defensive companies that chose a platform strategy.
Connecting customers. Another critical finding is that the nature of the chosen platform matters. The experience of successful platform players indicates that benefits increase when platforms redefine value propositions for customers, reshaping the demand side of the market. Many companies do so by enriching their products or services with information, social content, or connectivity, providing an easier experience for customers. Indeed, demand-driven platform plays, when combined with an offensive digital corporate strategy, are strongly correlated with superior financial performance—about six to more than seven percentage points in earnings before interest and taxes (EBIT) and revenues—relative to the nonplatform, defensive players.⁵ It is noteworthy that the revenues and EBIT of the latter group declined, suggesting that some companies will face greater competitive pressures ahead.

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Why are so many incumbent companies slow to respond more aggressively and to leverage platform models? One answer is that implementation requires incumbents to overhaul legacy IT systems while overcoming cultural and strategic constraints. Many are reluctant to disrupt today’s business model for an uncertain digital future. Most companies worry that they may open up the value pool to competitors if they cede power to customers via new platforms. Our research shows that this reluctance may be shortsighted.